Just under two months ago, when the $13 billion settlement for JP Morgan Chase was coming down the chute, word leaked out that that the deal was no sure thing. Among other things, it was said that prosecutors investigating Chase's role in the Bernie Madoff caper – Chase was Madoff's banker – were insisting on a guilty plea to actual criminal charges, but that this was a deal-breaker for Chase.
Something had to give, and now, apparently, it has. Last week, it was reported that the state and Chase were preparing a separate $2 billion deal over the Madoff issues, a series of settlements that would also involve a deferred prosecution agreement.
The deferred-prosecution deal is a hair short of a guilty plea. The bank has to acknowledge the facts of the government's case and pay penalties, but as has become common in the Too-Big-To-Fail arena, we once again have a situation in which all sides will agree that a serious crime has taken place, but no individual has to pay for that crime.
As University of Michigan law professor David Uhlmann noted in a Times editorial at the end of last week, the use of these deferred prosecution agreements has exploded since the infamous Arthur Andersen case. In that affair, the company collapsed and 28,000 jobs were lost after Arthur Andersen was convicted on a criminal charge related to its role in the Enron scandal. As Uhlmann wrote:
From 2004 through 2012, the Justice Department entered into 242 deferred prosecution and nonprosecution agreements with corporations; there had been just 26 in the preceding 12 years.
Since the AA mess, the state has been beyond hesitant to bring criminal charges against major employers for any reason. (The history of all of this is detailed in The Divide, a book I have coming out early next year.) The operating rationale here is concern for the "collateral consequences" of criminal prosecutions, i.e. the lost jobs that might result from bringing charges against a big company. This was apparently the thinking in the Madoff case as well. As the Times put it in its coverage of the rumored $2 billion settlement:
The government has been reluctant to bring criminal charges against large corporations, fearing that such an action could imperil a company and throw innocent employees out of work. Those fears trace to the indictment of Enron's accounting firm, Arthur Andersen . . .
There's only one thing to say about this "reluctance" to prosecute (and the "fear" and "concern" for lost jobs that allegedly drives it): It's a joke.
Yes, you might very well lose some jobs if you go around indicting huge companies on criminal charges. You might even want to avoid doing so from time to time, if the company is worth saving.
But individuals? There's absolutely no reason why the state can't proceed against the actual people who are guilty of crimes.
If anything, the markets might react positively to that kind of news. It certainly did so in the Adelphia case, in which the government dragged cable company executives John, Timothy and Michael Rigas out of their beds and publicly frog-marched them in handcuffs on the streets of the Upper East Side at 6 a.m.
The NYSE had been on a four-day slump up until those arrests. After they hit the news, it surged to its second-biggest one-day gain in history. From the AP report on July 25, 2002:
Although stocks began the day by extending a four-day losing streak, the arrest of top Adelphia Communications Corporation executives for allegedly looting the cable TV company triggered a broad rally that intensified as the session wore on.
Of course, that was an isolated example, and the broad market rally that day didn't save Adelphia, which had already gone bankrupt by the time of the Rigas arrests. But certainly it gave credence to the sensible argument that the markets generally would rather see the government punish criminals than not.
Anyway, it's hard to not notice the fact that crude Ponzi schemers like Madoff (150 years) and Allen Stanford (110 years) drew enormous penalties – essentially life terms for both – while no one from any major firm has drawn any penalty at all for abetting those frauds.
That's an enormous discrepancy, life versus nothing. But it makes an awful kind of sense. Madoff and Stanford were safe prosecutorial targets. There was no political fallout to worry about for sending up two guys who mostly bilked other rich people out of money. Also, there were no "collateral consequences" in the form of major job losses that had to be considered, just a couple of obnoxious families that would lose their jets and their ski vacations.
But most importantly, Madoff and Stanford were simple scam artists who could have come from any generation. There was nothing systemic about their crimes. It was possible to throw them in jail without exposing widespread corruption in our financial system.
That's what's so disturbing about this latest Justice Department cave. It underscores the increasingly obvious fact that the federal government is not interested in getting to the bottom of our financial corruption problem. They seem more to be treating bank malfeasance as a PR issue for the American financial markets that has to be managed away, instead of a corruption problem to be thoroughly investigated and fixed.
In a way, the administration seems to have the same motivation as Chase itself – as CEO Jamie Dimon put it last week, "We have to get some of these things behind us so we can do our job."
Madoff's con was comically crude: He never executed a single trade for a client, and instead just dumped all of their money into a single checking account. To say, as Madoff himself did, that his bank "had to know" what he was up to seems a major understatement.
Remember, independent investigator Harry Markopolos figured the whole thing out years before the Ponzi collapsed without the benefit of complete access to Madoff's financial information. Markopolos really needed just one insight to penetrate the Madoff mystery.
"You can't dominate all markets," Markopolos said, years ago. "You have to have some losses."
That this basic truth eluded both the SEC (which somehow failed to notice the world's largest hedge fund never making a single trade) and Madoff's own banker for years on end points to horrific systemic problems. A prosecutor who actually cared would floor it in court against everyone who made that fraud possible until he or she got to the bottom of how these things can happen.
Our response was different. We gave 150 years to the main guy, and now it seems we're quietly taking a check to walk away from the rest of it. It's not going to be a surprise when it happens again.